Changed landscape requires new ways of paying for development

Street vendors sell new notes of the local currency in Bangladesh. Post-2015 discussions should focus not on foreign aid but on how to enable developing countries to improve tax collection and spend revenues wisely that would allow them to pay for their own development. Photo by: Abir Abdullah / Asian Development Bank / CC BY-NC-ND

Increasingly, much of the developing world has enough revenue to pay for a growing share of its development. In fact, many countries can pay for basic government services, have growing domestic savings and have access to global financial markets.

It is in this context that the world will consider next round of what are known as the Millennium Development Goals — a set of agreed goals about poverty and human progress. An important component of this discussion is how countries will pay for this ambitious goal; an international financing conference is planned for July 2015 in Addis Ababa, Ethiopia. Improving developing countries to enable private enterprise that pays taxes, increase the ability for those countries to raise tax revenues and spend this money wisely should be the center of post-2015 conversation — not foreign aid.

In fact, foreign assistance should orient itself around this changed reality.

The scale and growth of domestic resources over the past decade are truly immense. In sub-Saharan Africa, for example, total “domestic resource mobilization” in 2000 equaled approximately $100 billion. By 2012 this figure was $530 billion. More broadly, the total amount of domestic resources available in developing and emerging market economies totaled $7.7 trillion in 2012.

To be sure, much of the increase in domestic resources over the past decade has been driven by the rapid rise in commodities. But countries across the developing world have grown richer, have seen more trade happen and have increasing amounts of their economies participating in the formal economy, which means, among other things, paying taxes. This rise in national gross domestic product has helped boost government revenue across the board, even as tax-to-GDP ratios have remained stubbornly low in many countries. In the Philippines, for example, its tax-to-GDP ratio has remained at 13.5 to 14 percent per year, but it has seen revenues rise from $10.3 billion in 2001 to around $38 billion in 2011.

Domestic resources are all the more important given the impact the 2008-2009 global financial crisis has had on foreign aid.

Beginning in the 1970s, rich donor nations represented through the Organization for Economic Cooperation and Development pledged to give 0.7 percent of their gross national income to foreign assistance. The global financial crisis makes it unlikely for many OECD countries to ever attain this target.

While foreign aid increased substantially in the early 2000s, eventually hitting a peak of around $134 billion in 2013, the global financial crisis ended this “bull market.” A number of traditional donors substantially reduced or ended altogether their aid programs under new austerity measures. With foreign aid not coming forward — and even if it did, it would be far smaller than the resources that developing countries already have — the way in which we think about aid should focus on its catalytic role leveraging these other financial resources.

This changed landscape requires a heavier burden of responsibility on developing countries for their own development, including delivering accountable governance (hopefully democratic), and moving toward open societies and competitive private sector markets. The facts on the ground imply far larger roles for the private sector, well-governed societies and local civil society. This requires a rethinking of what we do with limited amounts of official development assistance going forward.

In most developing countries, tax bases remain extremely narrow due to the size of the informal economy, proliferation of exemptions and reliefs, and a significant distrust by citizens as to how government spends its revenue. The ability to increase revenue is further limited by the institutional and human capacity of the agencies charged with implementing taxation. How these resources are expended is frequently inefficient because of subsidies, and poor budgeting and procurement capacities. And, of course, greater resource mobilization is challenged by corruption and illicit financial flows.

Given these challenges and with far more resources in developing countries to pay for basic services, donors should make governance a central priority. There remain many roles for foreign assistance but this changed world and the changed focus of the discussions at this summer’s Addis Ababa talks imply that much of what traditional donors do is going to require the biggest change to where foreign assistance puts its “people, time and money” over the next 40 years.

Importantly, this is a demand-driven conversation coming from poor countries themselves and not driven by the donor “supply side.” The attraction of “domestic resource mobilization” is clear: increased government accountability and less dependence on donors for traditional assistance with traditional strings attached. For local civil society, the domestic resource mobilization discussion helps fulfill the social compact between citizens and government and offers countries a path to self-sufficiency.

It will be tempting to dismiss the entire discussion about increased resources in developing countries as a way to reduce foreign aid budgets. There remain a number of important roles for foreign aid with good governance, including a wide set of public administration activities coming to mind. It will require significant adjustments in mindset among donor agencies, their parliaments and the aid advocacy community.

It remains to be seen if traditional donor countries are ready to move in this direction. The best advocates are poor countries themselves.

Should post-2015 discussions focus on how to get developing countries to improve domestic resource mobilization? Have your say by leaving a comment below.

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About the authors

  • Dan Runde

    Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at CSIS. His work centers on leveraging American soft power instruments and the central roles of the private sector and good governance in creating a more free and prosperous world. Previously, he led the Foundations Unit for the Department of Partnerships & Advisory Service Operations at the International Finance Corporation. His work facilitated and supported over $20 million in new funding through partnerships with the Bill and Melinda Gates Foundation, Rockefeller Foundation, Kauffman Foundation, and Visa International, among other global private and corporate foundations.
  • Conor Savoy

    Conor Savoy is the executive director of the Modernizing Foreign Assistance Network. He has over a decade of experience working on issues related to U.S. foreign policy and international development. Prior to joining MFAN, he was the director of Policy and Advocacy for the Global Innovation Fund, a social-first impact investor. Previously, he served as deputy director of the Project on Prosperity and Development at the Center for Strategic and International Studies. At CSIS, Conor helped build an innovative research program focused on the evolving role of the private sector in international development. He remains an active senior associate (nonresident) with his former program at CSIS. Earlier in his career, Conor worked as a researcher at the Council on Foreign Relations, concentrating on U.S. foreign and national security policy. He holds an M.A. in International Relations from Boston University and a B.A. with honors in History from George Washington University.